The “French Proposal” (Or, More Fun With SPVs)

I’ve decided I like that name much better than either “EU Brady Bonds” or “The Vienna Initiative.”

Via Tracy Alloway at Alphaville comes the text of the Greek rollover plan.  You can download the file here:   Download FBFProposal

A few highlights:

- ECB and Euro Area Central Banks hold €25bn out of the €85.5bn of GGBs maturing by 2014

-An estimated “significant percentage – up to 80%” -- of existing GGB holders would be willing to participate in the proposal

- The European Union and the International Monetary Fund would continue to provide new debt financing to Greece

-During July 2011-June 2014, Participants have the option to either:

(1) Invest a minimum of 70% of the principal amount of proceeds received in new GGBs,

• With a maturity at issue of 30 years; and

• A full principal guarantee by an SPV collateralised by zero-coupon bonds purchased from one or more AAA-rated sovereigns, supranational institutions or European agencies;
• Bearing interest at a rate of 5.5% plus the yearly Greek GDP growth capped at 2.5% and floored at 0% per annum

OR

(2) Invest a minimum of 90% of the Received Amounts in new GGBs:

• with a maturity at issue of 5 years; and
• Bearing interest at a rate of 5.5%. 

Correct me if I’m missing something, but given recent Greek 5-year yields, I don’t see Option 2 as being particularly attractive to most investors.

I’ll be back with more when I get some time to digest, but a few other quick thoughts:

-       There is plenty of skepticism out there as to whether “the French Proposal” accomplishes anything other than avoiding a Greek default, such as, oh I don’t know, reducing their debt load. See, for example, this statement from Unicredit credit strategist Tim Brunne.

-       Having said that, some observers have commented that the new investment seems a pretty rational one from an investor perspective, having both a growth index and a guarantee, as well as a long maturity

-       Meanwhile, in case you wondered what Greeks think of the new proposed austerity measures:

Police have fired tear gas in running battles with stone-throwing youths in Athens, where a 48-hour general strike is being held against a parliamentary vote on tough austerity measures.

Thousands of protesters have gathered outside parliament in the capital where public transport has ground to a halt.

Follow @KimKrawiec

Comments

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i like "EU Brady Bonds" better.

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Good article, thank you for sharing